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FRANCHISING & THE ENTREPRENEUR. Contents The role of franchising in U.S & global economy What is a franchise? Types of franchising The pros & cons of.

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Presentation on theme: "FRANCHISING & THE ENTREPRENEUR. Contents The role of franchising in U.S & global economy What is a franchise? Types of franchising The pros & cons of."— Presentation transcript:

1 FRANCHISING & THE ENTREPRENEUR

2 Contents The role of franchising in U.S & global economy What is a franchise? Types of franchising The pros & cons of buying a franchise Franchising and the laws The right way to buy a franchise Trends shaping franchising

3 The role of franchising

4 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 4 The Franchising Boom!!! Sales of $1.4 trillion annually from virtually every product or service imaginable Franchise sales account for 50% of total retail sales Top 500 U.S. franchisers operate more than 358,000 outlets with sales of $400 billion worldwide

5 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 5 Global Franchising 52% of U.S. franchisers have international outlets Of the U.S. franchisers who operate globally, 30% of their total outlets are located in other countries Hot markets: Europe and Pacific Rim

6 What is a franchise?

7 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 7 Franchising Franchising – semi-independent business owners pay fees and royalties to a parent company in exchange for the right to sell its products and services under the franchisers trade name and often to use its business format and system

8 Figure 6.2 The Franchising Relationship The Franchiser The Franchisee Oversees and approves; may choose site Provides prototype design Makes general recommendations and training suggestions Determines product or service line Can only recommend prices Establishes quality standards; provides list of approved suppliers; may require franchisees to purchase from the franchisor Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Sets quality standards and enforces them with inspections; trains franchisees Provides support through an established business system Chooses site with franchisers approval Pays for and implements design Hires, manages, and fires employees Modifies only with franchisers approval Sets final prices Must meet quality standards; must purchase only from approved suppliers; must purchase from supplier if required Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads Maintains quality standards; trains employees to implement quality systems Operates business on a day-to-day basis with franchisers support Site selection Design Employees Products and services Prices Purchasing Advertising Quality control Support Element Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.

9 Types of franchising

10 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 10 Types of Franchising Trade names Trade names Product distribution Product distribution Pure (business format) Pure (business format)

11 The pros & cons of buying a franchise

12 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 12 Why Buy a Franchise? Franchisees are buying the franchisers experience Going into business for yourself but not by yourself Franchisees get a proven business system and avoid having to learn by trial-and- error Before buying, ask: What can a franchise do for me that I cannot do for myself?

13 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 13 Benefits of Franchising Business system Management training and support Brand name appeal – Cloning Standardized quality of goods and services National advertising program

14 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 14 Benefits of Franchising Financial assistance – Franchise Registry Franchise Registry Proven products and business formats Centralized buying power Site selection and territorial protection Greater chance for success

15 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 15 Greater Chance for Success Study: After 5 years, 90% of franchises are still in business compared to 40% of independent businesses The difference? – Services, assistance, and guidance that experienced franchisers offer their franchisees

16 Source: National Federation of Independent Businesses and U.S. Department of Commerce. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

17 17 What Franchisers Want in Franchisees 1.People skills94% 2.Ability to be coached87% 3.General business skills86% 4.Access to capital84% 5.Entrepreneurial mindset76% 6.Specific industry skills29%

18 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 18 Drawbacks of Franchising Franchise fees and revenue sharing – Average franchise start-up cost is $200,000 – Royalty: 1% to 12% of sales Strict adherence to standardized operations Restrictions on purchasing

19 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 19 Drawbacks of Franchising Limited product line Unsatisfactory training programs Market saturation Less freedom – Happy prisoners

20 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 20 Ten Myths of Franchising 1.Franchising is the safest way to go into business because franchises never fail 2.Ill be able to open my franchise for less money than the franchiser estimates 3.The bigger the franchise organization, the more successful Ill be

21 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 21 Ten Myths of Franchising 4.Ill use 80 percent of the franchisers business system, but Ill improve upon it by substituting my experience and know-how 5.All franchises are the same 6.I dont have to be a hands-on manager. I can be an absentee owner and be very successful

22 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 22 Ten Myths of Franchising 7.Anyone can be a satisfied, successful franchise owner 8.Franchising is the cheapest way to get into business for yourself 9.The franchiser will solve my business problems for me; after all, thats why I pay an on-going royalty 10.Once I open my franchise, Ill be able to run things the way I want to

23 Franchising & the laws

24 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 24 Franchising and the Law Key tool for protection is the Uniform Franchise Disclosure Document (UFDD) Franchisers must deliver a copy of UFDD before any offer or sale of a franchise

25 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 25 Franchising and the Law The UFDD contains information on 23 topics, including: – Franchisers business experience – Franchise fees and costs – Lawsuits involving the franchiser – Financial assistance available – Territorial protection granted – Restrictions on purchasing

26 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 26 Detecting Dishonest Franchisers Claims that the contract is standard; no need to read it Failure to provide a copy of the required disclosure documents Marginally successful prototype or no prototype Poorly prepared operations manual Unsolicited testimonial from a highly successful franchisee

27 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 27 Unusual amount of litigation by franchisees Promises of future earnings with no documentation High franchisee turnover or termination rate Attempts to discourage your attorney from evaluating the contract before signing it (Continued) Detecting Dishonest Franchisers

28 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 28 No written documentation High pressure sale Claims to be exempt from federal disclosure laws "Get rich quick" schemes, promising huge profits with minimal effort Reluctance to provide a list of existing franchisees Evasive, vague answers to your questions Detecting Dishonest Franchisers (Continued)

29 The right way to buy a franchise

30 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 30 How to Buy a Franchise Preparation, common sense, and patience are vital ingredients in choosing the right franchise Evaluate yourself - What do you like and dislike? Research the market Consider your franchise options Get a copy of the franchisers Uniform Franchise Disclosure Document (UFDD) and study it

31 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 31 What Should You Look For? A unique concept or marketing approach Profitability A registered trademark

32 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 32 What Should You Look For? A business system that works A solid training program Affordability A positive relationship with franchisees (Continued)

33 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 33 How to Buy a Franchise Talk to existing franchisees Ask the franchiser some tough questions Make your choice (Continued)

34 Table 4.4 Advantages and Disadvantages of Buying a New vs. an Established Franchise ProsCons New Franchise Can be new and exciting Business concept can be fresh and different in the market Possibility of getting lower fees as a pioneer of the concept Potential for a high return on investment Business is not tested or established in the market Unknown brand and trademark Possibility that the concept is a fad with no staying power Franchiser may lack the experience to deliver valuable services to franchisees Established Franchise Business concept likely is well- known to consumers and market for the products or services is already established Franchiser has experience in delivering services to franchisees Franchiser has had time to work the bugs out of the business system High franchise fees and costs that often are non-negotiable Concept may be on the wane in the market Franchisers brand and trademark may remind customers of an outdated concept Franchisers trade dress may be in need of updating and redesigning Source: Based on Andrew A. Caffey, Age Issues, Entrepreneur, January 2002. p. 118.

35 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 35 Franchise Contracts Note clauses covering: Termination Renewal Transfers and Buybacks FTC Study: 40% of New Franchisees Sign Contracts Without Reading Them!!! Contract

36 Trends shaping franchsing

37 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 37 Trends Shaping Franchising International opportunities – Global markets offer fast-growth opportunities – Major markets: Canada, Mexico, Japan, Europe – Key to success: Adaptation Smaller, nontraditional locations – Intercept marketing

38 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 38 Trends Shaping Franchising Internet franchises Conversion franchising – 72% of North American franchisers use as a growth strategy Multiple-unit franchising – 34% of franchisees operate multiple outlets (and growing)

39 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 39 Trends Shaping Franchising Master franchising Piggybacking (or combination or multi-branded franchising) – Buddy system Serving aging baby boomers

40 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 40 Franchising as a Growth Strategy Issues to consider: – Is your business model replicable? – Have you developed an expansion plan? – Have you performed the necessary due diligence? – Do you have proper legal guidance? Initial cost to launch a franchise business is $100,000 to $750,000

41 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 41 Franchising Web Sites Entrepreneurs Franchises and Opportunities http://www.entrepreneur.com/franchiseop portunities/index.html http://www.entrepreneur.com/franchiseop portunities/index.html Inc.s Franchise Resource Center http://www.inc.com/resources/franchise/ http://www.inc.com/resources/franchise/ International Franchise Association http://www.franchise.org/ http://www.franchise.org/ FRANdata http://www.frandata.com/ http://www.frandata.com/


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